Last Updated Oct 16, 2008 12:57 PM EDT
Let the witch-hunt begin! The meltdown of the markets and financial systems in the last few weeks has led to the inevitable soul-searching. Last Sunday's papers were full of articles looking for the villains in this crisis -- Alan Greenspan and Gordon Brown were at the top of the list.
But is it that simple? After all, we are all involved in the system in some way, either as investors, homeowners or borrowers, and are therefore at least partially implicated.
Over the past few years, wasn't there a thought or two at the back of your mind that house price inflation and borrowing levels were a bubble that could not be sustained? Yet many of us kept borrowing and investing at levels that, in hindsight, seem ridiculous.
- Social Proof. You might also call this 'the madness of crowds', but we have an innate behavioural predisposition to follow the actions of others, whether that is our response to a fire alarm, the clothes we wear to work, or our decision to invest in a particular market.
- Authority. An essential element of an ordered society is a clear and structured authority. If authoritative figures say that something is right, we are extremely hesitant to question it. I am aware of an air crash, for example, when the co-pilot deferred to the captain even though he had grave reservations about the weather conditions.
- Scarcity. An item that is rare is worth more than something that is plentiful. We therefore have a desire not to miss out on an opportunity that may not last forever. If house prices are going up, we tell ourselves, we had better act soon or we'll never be able own the home of our dreams.
So what can we do? The answer I think is not to try and deny these forces. They are part of our human nature.
But we can start to question why and how we make certain decisions and which of Cialdini's six forces (the other three are reciprocation, liking and consistency, by the way) might be influencing us. By becoming more aware of the way in which we are being influenced we will, perhaps, become better decision-makers.
(Picture by Mike Licht, NotionsCapital.com,CC2.0 )